- Stablecoins — cryptocurrencies pegged to the dollar and backed by assets like Treasury bills — now total roughly $300 billion outstanding, led by Tether ($190B) and Circle ($76B), and are increasingly regulated under the Genius Act signed last year and the Clarity Act moving through the Senate.
- Despite new rules, stablecoins carry intrinsic risks: unlike bank deposits, they do not exhibit “singleness” (a dollar must always equal a dollar regardless of issuer), they have profit incentives to reach for yield, and they operate on fragmented proprietary infrastructures outside the Fed settlement system.
- Historical parallels are not reassuring — the free banking era of 1837–1863 saw widespread fraud and bank failures, and money-market funds “broke the buck” during the 2008 financial crisis when underlying assets lost value; the same dynamics apply to stablecoin runs.
- Despite regulatory hopes, stablecoins today are overwhelmingly used outside the US, account for 84% of illicit crypto activity per Chainalysis, and less than 1% of usage is for real-economy payments — raising questions about whether regulatory legitimacy will actually accelerate mainstream adoption.
What Happened?
WSJ chief economics commentator Greg Ip argues in a new analysis that stablecoins represent a revival of “private money” — a concept with a troubled history in the US. While the Genius Act (signed last year) and the Clarity Act (moving through the Senate) attempt to bring stablecoins into a regulated framework, Ip contends that the fundamental tension is structural: stablecoins try to import the credibility of public money while operating outside the Fed’s settlement system. They cannot achieve true “singleness” — the property that makes dollars trustworthy across all counterparties — because they move through proprietary, fragmented blockchains. And because they are profit-seeking enterprises, they have incentives to pay yield-like rewards, hold slightly riskier backing assets, and push legal interpretations to their limits.
Why It Matters?
Every major episode of private money expansion in US history has ended in crisis — the free banking era, money-market funds in 2008, and various crypto collapses more recently. The dynamic is consistent: confidence erodes, holders rush to redeem, issuers are forced to sell backing assets at depressed prices, and the contraction in private money amplifies economic stress. That is the opposite of the Federal Reserve, which can expand dollar supply elastically in a crisis. If stablecoins grow to a scale where a confidence event triggers a systemic run, the spillovers to banks, money markets, and broader credit conditions could be significant — and the Genius Act’s loopholes (uninsured bank deposits as backing, repo transactions involving bitcoin-denominated collateral, foreign coins like Tether’s USDT operating outside the law) leave meaningful gaps.
What’s Next?
The Clarity Act’s passage will be the next legislative milestone to watch — and the details of its interest/rewards prohibition will be closely scrutinized by an industry with a track record of finding workarounds. Banks are already moving to develop “tokenized deposits” as a regulated alternative that maintains dollar singleness while delivering blockchain efficiency. Whether that alternative gains traction, or whether stablecoins continue to scale ahead of regulation, will determine how large a systemic risk they pose in the next market stress episode. The BIS, the Fed, and academic economists are increasingly aligned in their concern — the question is whether Washington moves fast enough.
Source: The Wall Street Journal
